The U.S Stock Market Rally is Under Threat From Turmoil Around the World

Investors and companies are sounding alarms about the potential impact of the Middle East war on earnings, citing boycotts affecting sales and disruptions in the Red Sea shipping routes threatening supply chains. This poses a significant risk to the ongoing record rally in US stocks, as highlighted in a Bloomberg analysis of numerous earnings calls. By the midway point of the first quarter, references to the Red Sea or "geopolitics" have nearly equaled the total for the preceding three months.

‍

Anticipations for profits at S&P 500 companies for the next 12 months have reached a record high, indicating that analysts are factoring in an optimistic scenario with robust growth in the US economy and potential rate cuts by the Federal Reserve. However, any substantial threat to earnings or signs of resurging inflation could disrupt the months-long rally that has propelled the US benchmark to historic highs.

‍

The Israel-Hamas conflict has contributed to an increase in crude prices this year due to concerns about a broader conflict. Simultaneously, attacks by Iran-backed Houthi rebels have forced container ships to bypass the Red Sea and Suez Canal, impacting global trade routes.

‍

Geopolitical risks are viewed as the second-largest concern for investors after inflation, according to Bank of America Corp.'s latest fund manager survey. Participants expect an escalation in the Red Sea or the broader Middle East to intensify inflationary pressures, particularly on oil and freight rates.

‍

Several sectors, from consumer goods to social media and freight firms, are feeling the effects. Heineken NV and Adidas AG acknowledge macroeconomic and geopolitical uncertainties affecting their businesses. Tesla Inc. experienced production suspensions at its German plant, citing supply disruptions, while ResMed Inc. and Cisco Systems Inc. reported impacts on freight rates and shipping costs. Companies like Albemarle Corp., Philip Morris International Inc., and CSX Corp. within the S&P 500 are closely monitoring the situation in the Red Sea.

‍

Some companies, such as Royal Vopak NV, have benefited from increased demand for storage facilities due to disruptions in the Red Sea and oil market uncertainty. However, A.P. Moller-Maersk A/S expressed caution, anticipating industry challenges later this year when the boost to freight rates from the Red Sea conflict diminishes.

‍

On the retail front, many consumers in the Middle East and Muslim nations are boycotting major foreign brands in protest against perceived inaction by the US and Europe regarding Israel's offensive in Gaza. This has impacted the earnings of significant US businesses, with McDonald's Corp. and Starbucks Corp. reporting sales setbacks due to the boycotts. Snap Inc. also sees the conflict as a headwind affecting its performance.

‍

With the Israel-Hamas war ongoing and Houthi disruptions in the Red Sea persisting, concerns about geopolitical risks remain high. The war's continuation and shipping disruptions contribute to the complexity of the situation, affecting various industries and adding uncertainty to global markets.

‍